Commodity Market Guardians Lambaste Report

Opponents of commodity market position limits recently tried to use an agency advisory committee to advance their anti-oversight agenda but drew pointed criticism from key advocates of market fairness.

Chris Giancarlo, a Republican member of Commodity Futures Trading Commission (CFTC), recently reconstituted the long-dormant Energy & Environmental Markets Advisory Committee and tried to use the panel as a tool in the Republican campaign to subvert the use of position limits to regulate energy trading.

The Energy & Environmental Markets Advisory Committee was created by the Commodity Futures Trading Commission (CFTC) at the request of New England Fuel Institute (NEFI) and its allies in response to surging energy prices in 2008. The committee was created to provide a forum for dialogue between futures regulators and energy-dependent businesses and consumers.

Giancarlo, an outspoken critic of regulations enacted in the Dodd-Frank Wall Street Reform Act of 2010, reconstituted the group in 2014 and stacked it with representatives of large financial firms, major energy producers and others that share Giancarlo’s views on these matters, especially the proposed rule on speculative position limits. Despite requests both in writing and in person, NEFI and its coalition allies were not given a seat on the reconstituted committee.

The years leading up to the financial crisis had seen many allegations of price manipulation in the energy markets. Energy futures (and all commodity swaps) had been exempt from speculative position limits under a federal law enacted in 2000. Academics, market experts, consumer groups and a broad coalition of industry groups led by NEFI and the Petroleum Marketers Association of America (PMAA) warned that excessive speculation was distorting markets and exacerbating price volatility.

In response, Congress included in Dodd-Frank a requirement that the CFTC impose “hard” limits on speculative positions in the energy markets, and that it tighten exemptions from those limits.

Since first proposed in 2011, a rule establishing federal limits on speculative positions in the energy markets has languished thanks to a successful court challenge and vocal opposition from exchanges, financial firms, major energy producers and other special interests. However, with President Obama’s second term now coming to an end, Democratic CFTC Chairman Tim Massad has said publically that he intends to finish work on a final position limits rule this year.

Limits ‘Not Necessary’
Looking to delay a final rule, the stacked Energy & Environmental Markets Advisory Committee voted 8-1 a few weeks ago in favor of a report, written in secret and without input from the committee’s associate members, that slams the proposed rule as “not necessary.” The report advises the three CFTC Commissioners to either abandon the position limits rule or defer to the commodity exchanges in establishing limits and defining hedge exemptions. In specific, the report endorses the use of “accountability limits” over hard, mandatory position limits. Either option would have the CFTC reverting to the “status quo” that existed prior to Dodd-Frank, in which limits were either non-existent or voluntary and rarely enforced.

One member of he committee, Tyson Slocum of Public Citizen, a consumer advocacy organization, cast a dissenting vote. In a statement accompanying his vote, he criticized the committee’s process and the findings of the report. He pointed out that federal law requires the committee to include “a wide diversity of opinion” and said the actual membership is “weighted in favor of interests that may have a predisposition to opposing the concept of position limits.”

Slocum also noted that the author of the committee report, Doctor Craig Pirrong of the University of Houston, was benefitting financially from the International Swaps and Derivatives Association, the chief critic of position limits that led a court challenge in 2012.

Slocum said the report’s proposal to cede CFTC authority over position limits to the exchanges is a violation of Congressional intent. “The exchanges are for-profit companies that earn money by charging fees based on trading volume,” he said. As a result, exchanges have an inherent bias against meaningful position limits and in favor of broad exemptions. Congress acknowledged this competitive bias in Dodd-Frank when it empowered the CFTC – not the exchanges – with authority to establish position limits and define bona fide hedge exemptions. Former NEFI Chairmen of the Board Howard Peterson and Sean Cota communicated the same argument in testimony before relevant committees in the House and Senate, respectively, last year.

Two prominent U.S. Senators also chimed in. Sen. Sherrod Brown (D-OH) said in a statement that he was shocked a federal agency would rig an advisory committee to explicitly “undermine the law it’s charged with enforcing.”
Sen. Elizabeth Warren (D-MA) noted in a six-page letter to Commissioner Giancarlo that 25 of the 28 members and associate members of the committee were drawn directly from regulated industries “including oil and gas producers, electric utilities, and traders and exchanges for commodity and financial markets.” She called the drafting of the report “slipshod” and demanded it be rescinded until the CFTC diversifies the committee’s membership and hears from “expert witnesses without ties to the [financial] industry or government” including energy consumers and the general public.